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Abstract

By facilitating mutually beneficial transactions, trust is a crucial ingredient for economic development. We explore the determinants of trust by studying a model in which agents rely on imperfectly enforceable contracts to support cooperation in a prisoners’ dilemma production game. We show how a fundamental relationship between vulnerability and trust emerges when players observe private signals of the strength of contract enforceability, even in the limit as signal noise vanishes. In uncovering this relationship, the model demonstrates the importance of social institutions in the development process. We show stronger social institutions, by reducing vulnerability, increase equilibrium trust, promote the use of superior technologies, and interact with formal legal institutions.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-09.pdf
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Bibliographic Info

Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2012-09.

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Length: 22 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:swe:wpaper:2012-09

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Related research

Keywords: trust; global games; institutions; social protection.;

Find related papers by JEL classification:

• O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General
• D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
• O43 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

References

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